Too Big To Fail: an Absurd Proposition

Published: May 29, 2011 10:24 AM

With the coining of the phrase, "to big to fail" we have turned a corner in capitalism. When a business becomes too big to fail, then it must necessarily be too big to be sustainable. What the classification means in essence is that the government will be forced to bail out a business that is deemed too big to fail and shift the responsibility from the owners of the business to the unsuspecting American public through a government bailout.

Is that a good thing for our economy? Should banks be allowed to take on high risk investments to reap the profits if they succeed and then pass the losses to the American public if those risks prove too dangerous? Should corporations who provide vital defense-related products be afforded the same degree of public underwriting of risk? The answer to each question is a resounding no!

Our government is being foolishly reactive instead of being prudently proactive. They have a list of those companies that are too big to fail. We, the American public, should demand that our government put those companies on notice to get off that list. They can be removed by voluntarily downsizing until they are no longer too big to fail; or they should face federal intervention that forces downsizing to achieve that goal.

A basic economic tenet of entrepreneurship and capitalism is that the assumption of risk brings the rewards of profit. When a business enters into an agreement to deliver a good or service, some risk is assumed and the possibility of losing an investment is real. If the risk is relatively low, the entrepreneur will assume the risk because he believes it is manageable and employ his skills and experience to generate a profit. In simple terms: profit is not possible without risk. The key to profit is in risk management.

The table is turned when any business can transfer its risk to the American public. Those who do should also be willing to surrender any profits they generate to the risk-takers. So the government could simply invoke economic law by informing those too-big-to-fail companies that until they downsize sufficiently to be removed from the watch list, ALL of their profits will distributed to the American public. The government would not have to break up any companies as they would quickly act to save their profits.